Incident: On October 28, 2024, Yaxiang Co., Ltd. released its report for the third quarter of 2024. The company's revenue for the first three quarters of 2024 was 0.576 billion yuan, up 21.37% year on year; net profit to mother was 0.045 billion yuan, down 34.58% year on year; after deducting non-net profit of 0.044 billion yuan, a decrease of 30.96% year on year. Corresponding to 3Q24, the company achieved operating income of 0.215 billion yuan, up 14.84% year on year, up 14.72% month on month; net profit to mother was 0.01 billion yuan, down 57.10% year on year and 44.22% month on month.

Comment: The company's profit was under pressure in the first three quarters of 2024. I am optimistic that the Thai base project will be put into operation to open up room for future growth. The company's overall gross sales margin for the first three quarters of 2024 was 27.81%, a decrease of 3.35 pcts compared to the same period last year. Financial expenses increased 90.33% year on year in the first three quarters of 2024, mainly due to reduced income from exchange rate changes; sales expenses increased 17.71% year over year; management expenses increased 25.58% year on year; and R&D expenses increased 35.76% year on year, mainly due to increased investment in R&D materials. The company's net interest rate for the first three quarters of 2024 was 7.77%, down 6.70 pcts from the same period last year. We believe that the company's overall revenue continued to grow in the first three quarters of 2024, but product sales prices declined and period expenses rose, putting pressure on the company's profit performance. The commissioning of the company's production base project in Thailand is expected to consolidate and expand the company's market share and market position in the fragrance industry and enhance the company's profitability and market competitiveness.

The company's cash flow from operating activities declined year-on-year in the first three quarters of 2024. The net cash flow from the company's operating activities in the first three quarters of 2024 was 0.012 billion yuan, a year-on-year decrease of 38.25%, mainly due to an increase in operating accounts receivable. Net cash flow from investment activities was -0.193 billion yuan, up 231.83% year over year, mainly due to the company's increased investment in subsidiaries. The net cash flow from financing activities was 0.048 billion yuan, an increase of 173.86% year over year, mainly due to the increase in the company's 3Q24 borrowing. The balance of cash and cash equivalents at the end of the period was $0.178 billion, a year-on-year decrease of 41.63%. Accounts receivable were $0.243 billion, up 16.24% year over year, and the accounts receivable turnover increased from 2.37 times in the same period in 2023 to 2.69 times. Inventory turnover increased from 0.75 times in the same period in 2023 to 0.93 times.

The company is one of the main manufacturers of high-end spices in China, creating a scale advantage for some natural fragrance products. The company's main products can be divided into natural flavors, synthetic fragrances, cooling agents, etc. After years of development, it has become one of the main manufacturers of high-end spices in China. It has strong competitiveness and brand influence in the field of natural flavors and cooling agents. Products such as eugenol, vanillin and WS-23 occupy an important position in the global similar product market.

The company has a large-scale advantage in production and operation in fragrance varieties and some products. As of 1H24, the company has been able to mass-produce nearly 300 kinds of fragrances, including more than 160 types of natural fragrances, which can meet the needs of fragrance manufacturers for consistent fragrance quality, timeliness and stability of batch delivery, and multi-variety collective procurement, and enhance the company's profitability.

The company has customer advantages and has established long-term stable cooperative relationships with internationally renowned fragrance companies and well-known companies in the FMCG industry. As of 1H24, the company's products were directly sold to Givaudan (Givaudan), Firmenich (Firmenich), International Fragrance Essences (IFF), Symrise (Symrise), Frutarom (Frutarom), Takasago (Takasago), etc. among the top ten international fragrance companies, and was indirectly sold to Manshi, Senxin, etc. through ABT and other traders to achieve full coverage of the top ten international fragrance companies; the company's products were sold directly to Mars Wrigley, Ziyue International, Colgate, Urban Ranch, Yueke, Taste King, Aipu Biotech, etc. A well-known domestic and foreign FMCG company. We believe that optimizing the product structure, improving product quality, maintaining a good growth trend in sales revenue, and establishing stable business relationships with many well-known domestic and foreign companies will lay a solid foundation for the company's continuous development.

The company increases investment in R&D and construction, and actively expands existing production capacity. The company currently has four production bases. Domestic production capacity is distributed in Fuzhou, Jiangxi, Huanggang, Hubei, and Nantong, Jiangsu, and is promoting overseas production capacity in an orderly manner in Thailand.

In terms of the company's recent fund-raising projects, according to the requirements of the company's implementation of the vanillin pressure reduction plan, the new production capacity of vanillin products involved in the first phase of the “6500t/a flavor, fragrance and food additives and by-products of 15 tons of cinnamon essential oil and 1 ton of limonene project” will be adjusted to the production capacity of other marketable products, and production safety inspections will be carried out again. According to the company's 2024 semi-annual report, the construction project was officially completed and put into operation in 2024. The remaining unused capital raised by the project and the net interest income generated by the raised capital have been invested in the company's Thai production base project.

The domestic and foreign fragrance market is expanding steadily. According to data from Ai Media, the market size of the global fragrance and fragrance industry has been growing steadily in recent years. The market size was about 30.6 billion US dollars in 2023, an increase of 2.3% over the previous year, and is expected to increase to 32.1 billion US dollars in 2025. Currently, markets in developed countries such as North America and Europe are becoming saturated, demand growth is low, and the fragrance industry is gradually shifting to developing countries. As consumption levels in developing countries increase, the fragrance and fragrance industry will further develop as a supporting industry. At the same time, the global food and beverage industry tends to produce more products made from natural raw materials, and demand for natural flavors continues to rise.

In terms of the domestic fragrance and fragrance market, residents' living standards have improved and the consumption structure has been upgraded in recent years, providing a broad market space for the development of China's fragrance and fragrance industry. According to data from Ai Media Data Center and the “14th Five-Year Development Plan” for the fragrance and fragrance industry, the market size of China's fragrance and fragrance industry in 2023 was about 43.9 billion yuan, an increase of 2.6% over the previous year, and is expected to exceed 50 billion yuan in 2026.

The production base project in Thailand was completed and put into operation, and the release of production capacity contributed to performance growth points. According to the company's “Notice on Some Production Lines in the Fundraising Project Entering the Trial Production Stage” on August 29, 2024, the first phase of the Thai Yaxiang production base project was completed and trial production work was carried out; on November 11, 2024, the company issued a “Notice on the commissioning of the fund-raising project”. The production line has been officially put into operation after early trial production. The company will add 1,000 tons of vanillin, 200 tons of oak moss, 100 tons of benzaldehyde, 50 tons of benzyl alcohol, 100 tons of methyl laurate, 150 tons of xanthate, and 150 tons of xanthol. We believe that the release of production capacity from the company's Thailand project will strengthen the company's large-scale advantage, consolidate and expand the company's market share and market position in the fragrance industry, enhance profitability and market competitiveness, and promote the company's long-term growth.

The European and American markets for domestic vanillin products are facing anti-dumping, and the company rationally lays out overseas production capacity. According to the China Trade Relief Network, on May 24, 2024, the European Commission issued an announcement stating that in response to an application submitted by EU manufacturer Syensqo on April 9, 2024, the European Commission initiated an anti-dumping investigation on vanillin (Vanillin) originating in China. According to China Trade Relief Network, on November 12, 2024, the US Department of Commerce issued a notice making a preliminary countervailing ruling on vanillin (Vanillin) imported from China. The preliminary ruling was that the tax rate for Jiaxing Guihua Chemical Import and Expor t Co., Ltd. and other Chinese producers/exporters was 27.33%. The US Department of Commerce is expected to issue a final countervailing ruling on March 24, 2025. We believe that domestic and European markets for vanillin products are facing anti-dumping. The company's reasonable allocation of overseas production capacity in Thailand is expected to benefit the company's medium- to long-term profits.

Investment advice: The company is expected to achieve operating income of 0.775/1.093/1.383 billion yuan in 2024-2026, and realized net profit of 0.066/0.181/0.234 billion yuan respectively, corresponding EPS of 0.82/2.25/2.89 yuan, respectively. The PE multiples corresponding to the current stock price are 37.4X, 13.7X, and 10.6X, respectively.

We are based on the following aspects: 1) As a leading enterprise of high-end fragrance products in China, the company will continue to build a large-scale advantage in the production and operation of fragrance products; 2) in the context of the steady expansion of the domestic and foreign fragrance market, the company has achieved full coverage of the top ten international fragrance companies and has outstanding global customer resources; 3) the first phase of the Thai production base project has been officially completed and put into operation, which will consolidate and expand the company's market share, enhance market competitiveness, and contribute to performance growth points. We are optimistic about the company's leading position and scale advantage in the fragrance industry, as well as the Thai project to drive performance growth, cover for the first time, and give it a “buy” rating.

Risk warning: risk of price fluctuations of major raw materials; risk of macroeconomic fluctuations; risk of operating overseas markets; risk of falling short of expectations in overseas business commissioning, etc.